Policy in the pub

krugman and me july 2015

I will be debating the Chief Economist of the National Bank on Stimulus versus Austerity on August 19 at the Imperial Hotel in Melbourne on the corner of Spring and Bourke @ 5:30. These are the notes I am putting together, which will be added to as I go along. The picture is, of course, myself with Paul Krugman on 12 July at Freedomfest in Las Vegas. We were obviously separated at birth.

Using the term “Austerity” as the noun meaning sound finance and fiscal prudence already tips the debate, both here and internationally, in a negative direction

Back in the 1990s, before their ill-fated stimulus, I sat next to the Japanese Finance Minister at a lunch where I told him not to do it. His reply – “Don’t you care about the unemployed?”

I teach non-Keynesian economics and those who have never done economics before get it and those who have studied Keynes already find it difficult

Keynesian economics is a cult – believed in spite of the fact that it makes no economic sense and has never actually worked in practice

What’s the matter with you people?

The GFC was not, obviously, caused by a failure of demand. It was not caused by too much saving. In America, it was the product of a crash in the housing industry that fed into its financial system. In the rest of the world, the problem was entirely financial, with credit frozen across the globe.

The answer was the TARP which unfroze credit. The subsequent stimulus was not only unnecessary, but positively harmful.

See my Quadrant article from February 2009: The Dangerous Return to Keynesian Economics.

I also wrote my Free Market Economics, now in its second edition, to explain why the hysteria surrounding the GFC was misplaced and the stimulus would be a disaster

The notion of a “stimulus” is, of course, Keynesian. Economic theory always accepted a role for public spending as a palliative. No one thought of spending as a cure.

The idea of a stimulus is based on the belief that economies enter recession because there is too much saving. The government must therefore enter the picture and put those savings to use if the economy is not to enter a long drawn out recession and unemployment is to come down in a reasonable period of time.

The belief is that government must put those savings to work asap, even if the form in which the spending takes place is not in itself value adding. Even if the initial spending is not value adding, the multiplier will do the work of ensuring that the rest of the expenditure is properly based on profit-making activities.

The basis: Y=C+I+G. If C and I fall, G is raised to replace the missing expenditure.

C, I and G are final demand. The rest of the economy, the hinterland behind final demand, is ignored. It will simply structure itself to conform to whatever is being bought at the end of the production trail. Eventually everyone will be employed if there is enough spending on final goods and services.

Let’s take Bronwyn Bishop’s helicopter ride. It would be ludicrous to defend it as a way to stimulate demand. She could not claim that with a multiplier of three, let us say, she has added around $15,000 to GDP.

No one would think it would make sense if the Government said that every ministerial journey between 50 and 200 kms had to be by helicopter as a means to create jobs. We can all see straightaway how government waste of this kind has no positive economic effects.

Suppose we heard that entrepreneurially-driven construction activity with no government subsidy was to double over the next ten years, would we not all agree that the economy would be bigger and stronger at the end of that time, more jobs would be created and real incomes would rise.

But suppose, instead, we heard that over the next ten years there would be twice as many meetings of the Economic Society and the number of journal articles would double. What then would be the effect on output and employment, do you think?

Record 93,770,000 Americans Not in Labor Force…
Participation Rate 38-Year Low…
Record 56,209,000 Women Not Working…

Krugman’s Keynesian cluelessness reaches new heights

This is economic cluelessness reaching some kind of peak:

The point is that relatively good private sector performance has been masked by public-sector cutbacks; this is the opposite of what you usually hear, but that’s no surprise.

This is, of course, the point of cutting back on the public sector during bad times, as Obama was forced to do. Krugman is describing the current upturn that has followed the sequester. Making virtue of necessity is the way of the world. But the incapacity of seeing what a dismal detour all of the stimulus spending actually was is the province of Keynesians. Of course, the fall in public sector spending shows up as a fall in GDP. But that’s a fault of the statistic, not of the policy.

Importantly, the reality described is of a rising private sector that is finally being allowed to recover by cutting back on public spending. For a true equation of economic growth, you should try Y=C+I-G, just for a change. It’s still pretty subdued by this is why “austerity” has become the universal policy, irrespective of what our economic textbooks say.

Balanced budgets make economies stronger – the latest episode

A story on how balanced budgets have caused the Canadian economy to boom. From which this:

We have a lot of cases available to us to test the proposition that we will increasingly be hearing that balancing the books is over-rated. If the all-stimulus-all-the-time Keynesians are correct, for example, France should be the strong man of Europe, for its Socialist president came to power rejecting “austerity” and preaching the virtues of stimulus. Britain, which pursued a course of fiscal discipline under the coalition government of David Cameron, should be in steep decline.

Instead the head of the International Monetary Fund, Christine Lagarde, recently had to apologise to Britain’s Chancellor of the Exchequer for having wrongly warned that his austerity policies would provoke disaster, as Britain turns in one of the strongest economic performances in the EU. Overtaxed and tapped out France, by contrast, continues to be the sick man of Europe. Interviewed on British television Ms Lagarde acknowledged that Britain’s growth seems “pretty sustainable” because it depends on private sector investment and consumer spending.

Economic theory of the Y=C+I+G variety has a lot to answer for. Balanced budgets accompanied by limited growth in public spending are the key to prosperity. The opposite can be seen everywhere in the misery and harm that are caused (see the US for exhibit A). Canada and the UK are now examples of how private sector growth along with what others choose to call “austerity” actually do create the foundations for economic growth.

The end of the age of austerity even before it began


The US is heading the way of Detroit. Is there really no stopping this pillage. The headline is just as mad as the text of the story: With 2015 budget request, Obama will call for an end to era of austerity.

President Obama’s forthcoming budget request will seek tens of billions of dollars in fresh spending for domestic priorities while abandoning a compromise proposal to tame the national debt in part by trimming Social Security benefits.

With the 2015 budget request, Obama will call for an end to the era of austerity that has dogged much of his presidency and to his efforts to find common ground with Republicans. Instead, the president will focus on pumping new cash into job training, early-childhood education and other programs aimed at bolstering the middle class, providing Democrats with a policy blueprint heading into the midterm elections.

Does anyone in the United States think that public spending has actually been restrained? Do they actually also think that more spending will give them faster growth and higher employment? And the policy blueprint is a series of unproductive, wasteful projects that will waste more value than it creates. Early childhood education is just so value adding, in about twenty years when these children finally start to work and are so much more productive because of their early start on the education treadmill.

By the time of the next election, there will be a much reduced USA for others to salvage. It’s clearly a train wreck that no one can stop.